Argentina’s debt wrangle: politics triumphs over economics

Actors in default imbroglio will have to move again

by David Smith

Mon 4 Aug 2014

Whatever the final outcome in the tussle over how much – and when – Argentina pays its hold-out creditors, one element of the narrative is clear. A major player in the world of second-tier economies, with resources aplenty to sell in an age when soya, oil and gas represent a holy trinity of assets, once again has put domestic political considerations ahead of any concern about its economic credibility, its financial reputation, or its future borrowing power.

Argentina’s decision to opt against servicing its debts marks the second time in 12 years that its government has selected the path of default.

When the Argentines chose that route over Christmas and New Year 2001-02, I remember deputies in the Congress cheering from the rafters. Then, however, there was a touch of inevitability: in contrast to today’s circumstances, Argentina did not have the wherewithal in reserves to make the payments.

In the past few days, none of that euphoria has been on display in Buenos Aires. There is much more in the bank in terms of reserves. But the essence of the message is largely the same. Argentina has cast itself as a martyr, championing a developing world cause of resolving to pay (or not pay) its debts in a manner of its choosing.

And listen to the echo chamber of global opinion. The International Monetary Fund has serious concerns about what New York judge Thomas Poole Griesa is ordering, partly because of the message this sends to other countries in debt. Wall Street and the City of London meanwhile continue to hope for compromise.

The implication this time round is that Argentina may represent an undervalued opportunity in the days ahead. Possibilities of rewards and losses are indeed to be seen in the dramatic drop at the bolsa in Buenos Aires and the skyrocketing value of the unofficial dollar, as the country adjusts again to being a Latin American pariah starved of investment.

Even the bondholders of the restructured debt, mainly European, have appealed to the US judiciary to give Argentina more time, another ‘stay’, potentially to the end of this year, to get its house in order. That is an extraordinary commitment in view of the 31 December cut-off on which these bondholders lose the right to seek parity with any deal Argentina might make with the hold-out creditors.

Upholding parity is just what the Argentine government wants. If Buenos Aires can pay all creditors, including the hold-outs, 35 cents on the dollar, that amounts to victory. Such a pseudo-triumph would certainly be trumpeted furiously at home via a vigorous propaganda machine propagating the myth that Argentina is meeting its debts, rather than paying just over a third of what it once owed. The land of illusions, or maybe self-delusion, lives yet in denial of its actions.

The government, pumped up by its own propaganda, is selling the idea that this is a ‘technical’ default because it stood ready, with more than $500m already lodged in the US banking system, to make the latest payment to creditors who accepted the lion’s share deal of the 2005 debt restructuring.

Judging by the appearance of President Cristina Fernández de Kirchner before orchestrated crowds on the day after the court’s deadline for default passed, no quarter will be given even as Judge Griesa seeks once again to find a negotiated solution. The president’s comparison of Argentina to the war-hit territory of Gaza, ‘suffering financial missiles,’ underlines the rhetorical extremes used by the government to politicise the episode.

President Fernández de Kirchner bracketed the Gaza hyperbole with announcements of a 17% rise in state pensions as well as new price-restraint measures. Not by chance are the president’s approval ratings now rising for the first time since her re-election in 2011.

Despite governmental attempts to deny what has happened, the costs to the country will rise the longer it remains in default, however it is defined (S & P calls Argentina’s position ‘selective default’).

The government needs to borrow to govern. It will now print money to finance its deficits. That will fuel already-high inflation, deepening the recession that began this year, perhaps triggering economic contraction. Some estimates suggest the economy may shrink 3.5% this year.

That sobering future means that the private sector, led by the banks, will continue to look for a way out. A bank consortium, led by Argentine banks, did try to stitch together an 11th-hour package to pay the hold-outs almost 50% of what Judge Griesa ordered, with a de facto promissory note that would have guaranteed payment on 1 January 2015.

Buenos Aires has scuppered that approach, for the time being. But the government now occupies no man’s land, between default and denial. The only question is for how long. The status quo is not sustainable. The actors in the default imbroglio will have to move again. The world will be watching what happens next.

David Smith, member of the Advisory Board, is a writer, professor and adviser to NGOs based in Latin America.